Tuesday, April 15, 2014Last Update: 7:17 AM PT

SEC Clears Appeal on R. Allen Stanford Fraud

(CN) - Victims of a $7 billion Ponzi scheme failed to show that federal regulators dropped the ball in not catching R. Allen Stanford earlier, the 5th Circuit ruled. Investors in the Stanford International Bank Ltd. sued the Securities and Exchange Commission two years ago in Baton Rouge, La., under the Federal Tort Claims Act. They said the SEC knew of the bank and Stanford Group Co.'s scheming as far back as 1997, and that former Fort Worth regional enforcement director Spencer Barasch "was negligent and engaged in deliberate misconduct" by failing to investigate before the investors suffered massive losses. "Had Barasch not done as he did, none of the plaintiffs would or even could have invested with SIBL - its' doors would have been shut - and the damages suffered by the plaintiffs would have been completely avoided," according to their complaint. The investors alleged the agency had a policy of forwarding reports of Stanford's activities and that Barasch failed to pass on several red flags to the Texas State Securities Board and the National Association of Securities Dealers, among other regulators. Finding that the SEC has complete discretion in deciding what matters to investigate under the FTCA's discretionary function exception, however, U.S. District Judge Shelly Dick dismissed the suit. Dick said a regulatory agency's decisions over what to investigate are "quintessential" public policy decisions. A three-judge panel with the 5th Circuit affirmed Monday. Any failure by the agency to stick with the forwarding policy does not breach the scope of the discretionary function exception, according to the ruling in New Orleans. "Plaintiffs-appellants have not identified any mandatory obligations violated by SEC employees in the performance of their discretionary duties, nor alleged any facts sufficient to overcome the strong presumption that the SEC's decision not to pursue Stanford, however regrettable, was not grounded in policy considerations," the unsigned opinion states. Convicted of securities fraud in Houston, Texas, the 64-year-old Stanford is serving a 110-year sentence at a federal prison in Sumterville, Fla.